Getting Sales Compensation and Incentives Right

For companies both big and small, getting the compensation plan automated the right way is essential, and can mean the difference between stellar revenue growth, or stagnation and a demoralized sales force. In my posts Misaligned territories break your bottom line and Sarbanes-Oxley (SOX) and CRM: Lessons learned?, I tried to establish the importance of setting compensation strategy in a way which aims to direct the behavior of the sales force so that it is in line with the overall corporate strategy. This alignment between the Sales organization and the rest of the enterprise will reinforce the need to sell the right products at the right time.

In this post, I examine two further ways this alignment can be improved: 1) by providing sales management and the sales force with visibility into their compensation plans, and 2) the importance of having a nimble, adaptable compensation system.

An important reason compensations plans don't live up to their original goals is that people don't understand their plan and how it measures and rewards them, leading them to miss the point on what strategy is embodied in the plan. Stated another way, a well-built compensation system must have the corporate goals visible to the people who need to achieve them, by enabling reps to check and model their commission at any given time.

A transparent compensation system also eliminates the common-place practice of the salesperson's own accounting to assure he is compensated correctly, thus freeing more time to sell. Furthermore, checking and modeling commission can be an awesome motivational tool which also aligns the salesperson's drive to that of the corporate strategy.

For management, a transparent plan provides enough information to understand whether the strategy is being implemented. To maintain an ongoing alignment between strategy and the plan, a complete picture of how the plans are performing is important to quickly make decisions and tweak and adapt the plans. This also allows for nimbler tactical sales force management, i.e. the ability to direct sales force behavior in a more tactical and corrective manner.

A second direct benefit to management is that good compensation tools allow for easy creation of new plans. A compensation system with constraints prohibiting the design of plans which are aligned with strategy results in plans that can be implemented and managed, but which are not driving behaviors aligned with said strategy.

Third direct benefit to management is that good compensation tools allow for the quick creation of mew plans. A compensation plan can fail if it's heavily hard-coded, inflexible, and labor-intensive, because it will not be quickly adaptable to a changing strategy.

Finally, a nimble and transparent compensation system can also have market-differentiating qualities: it can be essential in getting products and services to market faster, by motivating the sales force to focus on selling these new products or services.

How does one go about building a solid compensation system? As with other CRM and SFA solutions, you can build it, buy it, or get it in the format of on-demand. Many companies have simple databases with Excel front-ends. While rudimentary, this solution is quite appropriate if the compensation plans are simple, and the sales force relatively small.

However, compensation plans can see their complexity increased both quickly and exponentially. Factors such as no-pay or returned product adjustments, team and territory management, and tiered plans can moderately complicate the calculations, and may signal the need to move to a more complex application able to support these business rules. Again, one could build this in-house, if there is no foreseeable further increase in complexity. SFA and CRM vendors also often provide simple to relatively complex compensation modules. These solutions are available both on-premise (Oracle, Siebel, Sage) and on-demand (NetSuite, Siebel OnDemand).

When a compensation plan starts to involve business rules such as multiple partner channels and distributors, and overlapping territories, it makes sense to consider the niche players such as Synygy and Centive, which are able to roll out plans of virtually limitless complexity, for even the largest sales forces.

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Keyword Tags:
SFA
compensation
incentive
sales
CRM

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